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Facing Facts Alert 4

Number 4, July 10, 1995

Facing Facts Alert 4

FACING FACTS
The Truth about Entitlements and the Budget
A Fax Alert from The Concord Coalition
FAX ALERT ( Number 4, July 10, 1995)
THE FACTS ABOUT FEDERAL PENSIONS
In its campaign to block cost-cutting reform of civil service and
military pensions, the federal retiree lobby has made much of recent
studies by the Congressional Research Service (CRS)* which purport to
show that these pensions are neither overgenerous nor underfunded. THE
FACTS ABOUT FEDERAL PENSIONS, a report released today by The Concord
Coalition, reviews the evidence and concludes that CRS is wrong.
Federal pensions are far more generous than typical private-sector
pensions. Here are the facts:
CRS says there is almost no difference between federal civil service
and private-sector retirement ages.
Fact: The average age at which private-sector workers begin to collect
an employer pension is 62; the average age at which they begin to
collect Social Security retirement benefits is 64. In 1993, the
average age at which federal civil servants began to collect a pension
was 58ufour to six years earlier.
CRS says the average civil service retirement benefit is virtually the
same as the average private benefit.
Fact: In 1992, the average pension annuity based on private-sector
employment was about $600 per month. The average pension annuity based
on civil service employment was about $1,420 per monthu2.4 times
larger. Even if we include Social Security in the comparison, federal
pensioners still enjoy higher benefitsuroughly 1.6 times higher (in
1986).
CRS says there's no reason to question the wisdom of a military pension
system that encourages servicemen to retire with full benefits after
just twenty years.
Fact: There is a long-standing controversy over the appropriateness of
the military pension system's early retirement ages, which now average
42 for enlisted men and 46 for officers. Many believe it is a costly
and unnecessary waste of skills and training for the typical military
pensioner to spend more years collecting benefits (an average of 35
years) than earning them (an average of 22 years).
CRS says critics of automatic COLAs on federal pensions are misguided
since this is a feature of federal pensions that private plans should
emulate.
Fact: The usual standard for judging the generosity of federal pay and
benefits is "comparability" with the private sector. By this standard,
the 100-percent-of-CPI COLAs paid to most federal pensioners are lavish
indeed. Only a small fraction of private pensions receive any
inflation adjustment, and virtually none receive annual CPI COLAs.
CRS says it's wrong to be concerned about the unfunded liability of the
federal pension system since the government can't go out of business
and thus will never have to pay off the liability all at once.
Fact: The significance of the unfunded liability of the civil service
and military retirement systems has nothing to do with risk of
bankruptcy. That liability, which officially totaled $1.1 trillion at
the end of FY 1992, is a measure of the net gift we are asking from
taxpayers in future years to cover benefit promises that have already
accrued in past years. The liability is important precisely because the
federal government is not expected to go out of business. To the
extent that the government's pension promises are deemed unbreakable,
they will have to be paid offujust like the publicly held national
debt.
The Bottom Line on Pension Generosity
A simple way to compare the overall generosity of federal and private
pensions is to look at what actuaries call "normal cost." Normal cost
is the flat percentage of pay that someone would have to contribute,
throughout an employee's work tenure, to cover the cost of his or her
lifetime pension benefit; "employer cost" is the share of normal cost
borne by the employer.
The employer cost of a typical private-sector pension plan plus Social
Security is 12.2 percent of payroll. According to OPM, the normal cost
of civil service (CSRS) pensions was 28.3 percent of payroll in 1992.
Netting out the employee contribution of 7.0 percent, that yields a
total employer cost of 21.3 percent of payroll for the civil service
retirement packageu1.75 times the cost of a typical private-sector
retirement package. As for military pensions, DOD puts their normal
cost at 36.4 percent of payroll. Add in 6.2 percent for Social
Security (under which all military personnel are automatically covered)
and you get a total employer cost for the military retirement package
of 42.6 percent of payrollu3.5 times the equivalent private-sector
figure.
Misleading Arguments
The case that federal pensions are overgenerous seems open and shutuand
it is. So how do apologists for federal pensions get around the
facts? Here are the most common arguments which are used to make these
plans appear less generous than they areuor else to justify their
greater cost to the extent it can't be ignored.
Federal pension advocates avoid talking about normal costuthe most
comprehensive measure of pension cost. Instead, they discuss
replacement rates, that is, the share of preretirement earnings
"replaced" by a pension. These may sometimes be the same for a civil
service pension and a private pension plus Social Security. What the
apologists fail to add is that replacement rates do not reflect the
fact that federal pensions are calculated using a more generous
definition of final salary ("HI-3" or highest three years of pay), or
that federal retirees can begin collecting full benefits at earlier
ages, or that federal pensions are fully indexed for inflation and so
become a better deal over time.
Another tactic is to limit the comparison to an elite among
private-sector pensionersuto those retiring from medium and large
firms, from Fortune 500 firms, or even from the "top-50" among the
Fortune 500. It certainly never occurs to the apologists to compare
the deal federal pensioners get with that of the roughly half of all
private-sector workers who have no pension and so must save for
retirement out of their own incomes.
If pressed, the apologists may grant there once was a problem with
overgenerous federal pensionsubut will then add that it was "fixed"
back in the mid-1980s. The truth is that the reforms they refer to
left the overall generosity of the total federal retirement package
virtually unchanged even for newly hired employees, and in any case
grandfathered everyone already working for the government. As far away
as 2024, a majority of civil service benefits will be paid out under
the "unreformed" (CSRS) system.
Another fall-back position is to defend generous pensions as a just
payoff for inadequate salaries. The problem with this argument is that
it flies in the face of common-sense evidence. The average pay for all
full-time-equivalent federal civilian employees is one-third higher
than the average pay for all full-time-equivalent private-sector
employees. In other words, we would have to assume that federal
workers are one-third more productive simply to conclude they are not
overpaid. A related argument is that generous pensions are justified
by the unusual financial hardships faced by federal retirees. This
claim has no shred of plausibility. In 1991, households receiving a
military pension had an average total income of $52,248; those
receiving a federal civil service pension had an average total income
of $45,912. These figures are 114 and 88 percent higher than the
average for all elderly households; 56 and 37 percent higher than the
average for all households receiving retirement pensions; and, indeed,
38 and 21 percent higher than the average for all U.S. households.
If all else fails, federal pension advocates abandon any pretense of an
appeal to comparability and instead argue that government should be a
"model employer." According to this argument, private employers
generally offer a level of retirement compensation far beneath what
would be in their employees' best interest. Therefore, government
should set a good example in order to persuade the private-sector to
follow suit. The apologists don't say why the optimal mix of
compensation consistently eludes private-sector employers and employees
in their negotiations. Nor do they acknowledge that more generous
private-sector pensions would have to be paid for through a cut in
take-home pay. The idea simply seems to be that it would be nice if
everyone had the kind of pensions federal employees have.
The irony is that today's "model employer" federal pensions, by
increasing the cost of government, leave less income in the hands of
private-sector workers to allocate to either current pay or future
retirement planning. That irony will not escape taxpayers. As
Congress deliberates changes in entitlements that will affect the
benefits most Americans someday expect to receive, federal pensions
must be on the table. It is fair. And it is a fiscal and political
necessity.
*See "Federal Employee Pensions and Private Employee Pensions" (CRS;
October 24, 1994); and "Federal Civil Service Retirement: Is There a
Financing or Funding Problem? (CRS; March 18, 1995.)